RBI imposes curbs on banks' trading in currency futures and options

The Reserve Bank of India (RBI) has banned all proprietary trading in currency futures and options by authorised dealer banks with immediate effect, in a bid to arrest the declining trend in the value of the Indian rupee.

While the RBI has barred authorised dealer banks from trading in currency futures and options (F&O) on their own, they will, however, be allowed to trade on behalf of their clients.

"On a review of the evolving market conditions, it has been decided that... AD (authorised dealer) category-I banks should not carry out any proprietary trading in the currency futures / exchange traded currency options markets,'' RBI said, adding that any transaction by these banks in the currency futures markets should necessarily be on behalf of their clients.

The move had some immediate impact on the currency market with the rupee gaining in early morning trade.

The rupee was trading at 60.12/13 per dollar at 11:10 am, after rising as high as 59.60 in early trade, and above the record low of 61.21 hit on Monday.

Perhaps for the first time, a concerted effort is being made by the RBI, other regulators and the government to arrest the rupee's fall.

On Monday, market regulator SEBI tightened the exposure norms for currency derivatives to check large-scale speculations in the market.

In its circular SEBI has directed that brokers and their clients should reduce the exposure on currency derivatives while it doubled margins on dollar-rupee contracts.

Currency derivative trading allows investors to take forward contracts on various currency pairs, including rupee-dollar and this seems to have contributed in large measure to speculative hammering of the Indian currency.

Prime minister Manmohan Singh yesterday addressed a meeting of industrialists to take stock of the situation and to solicit their views on the currency volatility.